Analysis of Politics, Philosophy and Economics from a Marxist Perspective

Thursday, 11 August 2016

Sell Everything!

The former bond king, Bill Gross, and the new bond king, Jeffrey Gundlach, have both come to the same conclusion. Everything is too expensive – sell everything!

They are not alone, Marc Faber, Editor of the “Boom, Doom and Gloom Report”, told CNBC, a couple of days ago, that he saw the S&P 500 dropping by 50%, which would wipe out the last five years of gains. The speculators continue to pray for the Federal Reserve to follow the example of the Bank of England and ECB, and to cut rather than raise interest rates, and to engage in further money printing. But, all the central bankers know that game is pretty much up. A sign of it was the fact that the Bank of England now owns so much of the UK's debt that, when it came to buy more of it, earlier in the week, it could not find willing sellers. The ECB has had similar problems.

The faith that these supposed messiahs of free markets have in the power of central state planners, in the world's central banks, to determine the market price of capital is astonishing! If they have that much faith in the power of bureaucratic planning why not go the whole hog, and have those planners set all market prices, and allocate capital accordingly?

But, of course, as Marx pointed out more than 150 years ago, following on from the work of David Hume, Joseph Massie and others, it is not possible to determine market prices for long.

“The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”

Nor can the rate of interest be reduced by simply printing more money tokens. A central bank can influence the prices of some financial assets. It can remove some currency from circulation, and because money-capital necessarily takes the form of money, that reduces the supply of money-capital. But, if economic activity is particularly vibrant, capitalists can always find other ways of providing themselves with currency and credit. For example, they can increase the amount of commercial credit they each give to one another, which thereby reduces the amount of money required as currency, making it available to function as loanable money-capital. Marx quoted some of the capitalists themselves to that effect.

“"5306. If there should not be currency to settle the transactions at the clearing house, the only next alternative which I can see is to meet together, and to make our payments in first-class bills, bills upon the Treasury, and Messrs. Smith, Payne, and so forth." — "5307. Then, if the government failed to supply you with a circulating medium, you would create one for yourselves? — What can we do? The public come in, and take the circulating medium out of our hands; it does not exist." — "5308. You would only then do in London what they do in Manchester every day of the week? — Yes."” (Capital III, Chapter 33, p 538)

But, a central bank, even then has far more power to raise interest rates than it does to lower them. A central bank can take currency out of circulation so as to reduce the amount of money that can act as money-capital, but simply pumping more money tokens into circulation does not even mean that it will circulate as currency, let alone that it will circulate as money-capital. Keynes pointed to the problem of pushing on a string. In other words, more currency can be put into circulation, but if consumers – either private or productive consumers, i.e. consumers out of revenue or out of capital – do not wish to use it to increase their demand for commodities, it will simply sit in bank deposits, and the velocity of circulation will be reduced.

But, if the increased currency does go into circulation for the purchase of commodities, unless it provokes an actual increase in economic activity, resulting in an increased production and circulation of commodities, this increased quantity of money tokens, will simply result in each token's value being diminished, so that the money prices of commodities will rise – inflation! That inflation, rather than causing interest rates to fall will tend to cause them to rise, because bond buyers will anticipate the future real value of returns on those bonds to be lower, and so will demand a higher nominal rate of return, whilst existing holders of bonds, will anticipate a lower real capital value of the bond, when it matures, and so will seek to sell it early.

The only thing that a central bank can do by printing money is to buy specific financial assets. That means that it usually buys government bonds, but as these have themselves become in short supply in some instances, central banks have also bought some higher grade corporate bonds. In Hong Kong, in the past, and in China more recently, the central bank has overtly intervened to also buy shares on the stock market, to prevent further collapses of share prices. There have been rumours that in the past, US authorities have also intervened covertly to manipulate stock and bond prices.

But, in buying these assets, and pushing up their price, the consequence is to divert capital from other areas, so that what causes a lower yield in one place causes a higher yield in another, relative to what it would otherwise have been. It also has other consequences. For example, by creating a bubble in stock and bond prices, this has raised the cost of pension provision, as each Pound, or Dollar of pension contribution now buys fewer shares or bonds to go into the pension fund. It thereby undermines the capital base of pension funds, required to produce future dividends and interest. It is that which has been the biggest contributor to current pension scheme black holes.

But, the same factor has also reduced yields on those bonds to near zero, so that what capital does exist in the pension fund, now produces a smaller yield than it would otherwise have done, which thereby means that pension revenues increasingly fail to cover pension liabilities. That has been compounded by employers taking contribution holidays, and funds paying pension liabilities out of liquidated capital gains rather than revenue, which turns the scheme into a Ponzi Scheme, with the liquidated capital, used to cover current liabilities, having to be made good by current scheme contributors.

That massively increased cost of pension provision, resulting from QE, means that the value of labour-power rises, and the rate of profit falls – or at least it will, when these pension black holes are eventually rectified. One likely course for that to take will be for all of the liquidity sloshing around the system to find its way into higher wages, or taxes to cover those deficits, with the cost being passed on in higher money prices, i.e. commodity price inflation rising sharply, with a consequent rise in interest rates.

The same thing applies to the astronomical inflation of property prices that has also flowed from the speculation caused by money printing, and government incentives for such speculation, whilst restricting the potential for higher housing supply. Once again that is a massive increase in costs that is not currently reflected in wages, or commodity prices, but sooner or later will be, causing once again a sharp rise in interest rates.

And in fact, that is already occurring. However much the apologists for the financial speculation want to believe that central banks can control interest rates, by money printing or diktat, they cannot. Marx was aware of that long ago, and pointed out that it is not these official government rates or the yields on government bonds that give an accurate picture of what is happening to the average rate of interest, but the actual rates that real people are confronting every day in the market.

“For instance, if we wish to compare the English interest rate with the Indian, we should not take the interest rate of the Bank of England, but rather, e.g., that charged by lenders of small machinery to small producers in domestic industry.” (Capital III, Chapter 36, p 597)

If we consider the 4000% p.a. interest that millions of people are currently paying in the UK, on pay day loans, or the fact that millions of small businesses are unable to obtain loans, and many more have resorted to peer to peer lending and other forms of finance, which typically costs them around 10% p.a., its quite easy to see what the other side of the manipulated low yields on government bonds is.

Rates are already up, he says, when you look at these real market rates. Three month LIBOR has risen from 25 bps to 81 bps, he says, which is a huge rise in market interest rates, which indicates a significant tightening in the money market is occurring that no one is seeing, because they are blinded by the official interest rates.

Bill Gross says,

“Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels. I don't like bonds; I don't like most stocks; I don't like private equity. Real assets such as land, gold, and tangible plant and equipment at a discount are favoured asset categories.”

The idea of buying “tangible plant and equipment” is exactly what Marx said money-lending capitalists would be forced to do under such circumstances. In other words, as the yield on interest-bearing capital falls too low, and the potential gain from it is outweighed by the risk of losing the capital, money-lending capitalists would be forced to turn themselves back into industrial capitalists, putting their money-capital to work directly as real capital setting up productive or commercial businesses, so as to make profits, rather than rely on interest.

Provided, as Marx says, any financial crash does not, or is not allowed to, turn into a credit crunch, which prevents the actual circulation of commodities, such conditions, in fact, can create the potential for strong economic growth, as a consequence of this investment in real capital. But, Gross is wrong in describing land as a real tangible asset. Land is certainly real and it is certainly tangible, but unlike plant and equipment, which has a real value, because it is the product of labour, and as such has a capital value, its potential to produce the average rate of profit, land has no value. It is not the product of labour, it has no price of production. It has a price, because it is bought and sold as a commodity, but that price is only a capitalisation of the rent it can produce.

In that respect, land is no more a tangible asset than are shares, or bonds, or other paper assets, and for the same reason the price of land has been just as ludicrously inflated as have the prices of those other paper assets. In the same way, gold, which is also favoured by Gundlach, as well as Gross, is a tangible asset, and it does have value, and a price of production. But, unlike plant and machinery used as productive-capital, gold does not have a capital value. It is merely a commodity, and not used as capital. It does not, therefore, like plant and machinery have a capital value, derived from its ability to produce the average rate of profit.

The real value of gold, as an asset, under such circumstances, is merely to act in its historic role, as a store of value, so that anyone holding it, at a time when paper currencies get destroyed by inflation, and when fictitious capital gets destroyed because periods of speculation come to an end, and interest rates rise, gets to retain that store of value, whilst the prices of shares, property, and bonds collapse.

But, the reality is that over the last thirty years, speculation went from the normal concern of interest-bearing capital to maximise its yield, to an increasing concern instead to maximise speculative capital gains on assets, and as that bubble has inflated to enormous proportions, increasingly has turned to an attempt to simply preserve existing capital gains – a concern for the return of capital rather than with the return on capital. But, in that process, as paper asset prices became increasingly divorced from reality, so speculators were driven to other assets that might give similar types of speculative capital gain.

Anyone who bought gold, when I first advocated doing so, around 2002, and sold it when I advocated doing so in 2011, would have seen the price of gold rise from around $250 an ounce to around $1950 an ounce, a speculative gain of around 800% in 8 years, which rather beats the 2-3% p.a. you might have obtained in interest during that period. But, when gold peaked out at that level in 2011, it simply saw the speculation move into other areas that had also been seeing speculative buying during that period. So, speculators bought works of art at ever ludicrous prices, they bought bottles of vintage wine that will never be drunk, but exists only as an object of speculation, and whose price rises higher and higher without any connection to the actual use value of the contents of the bottle; other things such as diamonds, bitcoin and so on have been objects of such gambling.

The reality is that the prices of these things have no relation to their use value, or to their price of production. They are simply the consequence of speculation, for items that are in limited supply. But, for exactly the same reason that the speculative bubbles in financial assets always burst violently, so these other speculative bubbles will burst along with them. Gold has already fallen from its speculative high of around $1950 in 2000, and now stands at a round $1300, which is approximately its price of production. Its unlikely to see a return to the previous speculative highs this side of the bursting of the global financial bubble. As happened the last time round, in 1980, after having made a real terms high in 1960, the next high point for gold will be a nominal high fuelled by high levels of inflation.

There is increasingly nowhere for the speculators to hide, and the central banks have even lost their ability to raise the prices of government bonds. As I described in my book, all that has been achieved since 2008, is to exacerbate the underlying conditions that led to the financial crash in the first place, rather than dealing with those underlying problems. For that reason, as I describe, the consequence will necessarily be that the crisis will reassert itself even more violently. The day of reckoning for that resolution is approaching faster by the day.

About Me

Left school at 16. Became an ASTMS shop steward at 19, and a lifelong trade union activist. Delegate to North Staffs Trades Council 1974-87. Secretary North Staffs Miners Support Committee 1984-5. President North Staffs Trades Council 1985-6 and 1986-7. Delegate to Staffordshire Association of Trades Councils 1985-7. Delegate West Midlands Regional Council of the TUC 1985-7. Secretary Newcastle UNISON 2000-2.
Member of the International Communist League/Workers Socialist League 1974-87.
Went to University as mature student at age of 24. Obtained Joint Honours Degree in Economics and Politics with Philosophy and Statistics, followed by a Post Graduate Certificate in Education.
Labour Party member since 1974. Stoke City Councillor 1983-4, expelled from Labour group 1983, and resigned from Council in 1984 because of refusing to vote for rent and rate rises, and budget cuts. Staffordshire County Councillor 1997-2005.
Assistant Secretary Stoke District Labour Party 1981, and held pretty much every position from Executive member, to Branch Secretary, and Branch Chair.